The Date For Full Compliance With The SECs New Marketing Rule Is Rapidly Approaching! Is Your Firm Ready?
Basic information about the new marketing rules
As most registered investment advisory firms ("RIAs" or "Advisers") know it, the Securities and Exchange Commission (SEC) amended Rule 206(4)-1 (Publicity Rules) of the Investment Advisers Act of 1940 (the "Act"). . : ), which updated the rules related to RIA advertising and customer acquisition activities (known as the new "Marketing Rule"). The new marketing rules will continue to be issued under Rule 206(4)-1, but Rule 206(4)-3 (relating to attorney fees) is repealed. The new marketing rules were approved in December 2020 and entered into force on May 4, 2021. Advisers have been given an 18-month transition period to develop new marketing rules, appropriate record-keeping requirements and policies and procedures to update Form ADV. Effective November 4, 2022, SEC registrants will be required to comply with all provisions of the Marketing Rules. Some state regulatory schemes follow the recommendations of the Securities and Exchange Commission, or if state regulators decide to change state marketing rules to reflect SEC requirements, state RIAs should be aware of those changes.
What can be considered advertising?
The RIA should be familiar with the basic elements of marketing rules, starting with what is considered "advertising." The Securities and Exchange Commission (SEC) has changed the definition of "advertisement" to include direct or indirect contact with more than one person about securities advisory services provided by an RIA to a prospective client or private fund. There is an exception . When introducing hypothetical performance elements, advertising is defined as communication with a single person. The definition of advertising also includes communications that offer new advisory services to existing clients or private fund investors. This definition expressly excludes various items, including personal contact with a single individual or family (where such contact does not contain hypothetical performance information). Second, this definition generally includes any endorsement or certification that directly or indirectly provides the consultant with monetary or non-monetary compensation (eg, direct brokerage, fees or other remuneration, reduced consultant fees).
Notably, the marketing rules include testimonials (client statements about RIA services that support the advisor's work and are intended to promote the advisor's line of business) and endorsements (eg, non-client statements that encourage potential clients to contact the advisor). . RIA). Use of testimonials and endorsements is subject to various disclosure requirements, including disclosure of material information related to compensation arrangements (direct or indirect) and applicable conflicts of interest. Advisors should be aware that parent companies, referral programs, and other platforms that promote advisors and refer business advisors are likely to be considered endorsements.
The new marketing rules allow third-party ratings to be used in ads. A third-party rating is defined in the Marketing Rules as a consultant or person providing ratings, other than an affiliate.
general prohibition
The Marketing Rules also contain seven general prohibitions that apply to all RIA advertising, including testimonials and endorsements:
The statements shall not falsely state a material fact or any fact necessary to make a statement that is not misleading under the circumstances in which it is made.
Statements may not be made to indicate that the advisors do not have reasonable grounds to believe that the Securities and Exchange Commission will be able to demonstrate this upon request.
Advertisements may not contain information that could create a false or misleading impression or conclusion about a material fact about the investment adviser.
Advertisements may not discuss the potential benefits to clients or investors associated with the investment adviser's services or practices without fair and balanced treatment of the relevant risks or limitations associated with the potential benefits.
Advertisements may not refer to specific investment advice given by an investment adviser unless such investment advice is given in a fair and balanced manner.
Advertising may not include or exclude performance or portray performance periods in an unfair and unbalanced manner.
Advertising cannot be misleading.
In relation to previous prohibition guidance, the SEC provided some examples of advertisements that fail to meet the "fairness and balance" standard. The last criterion is a general rule for considering advertisements that do not specifically violate the first six general prohibitions, but are presented in a way that is misleading to the reader.
performance report
The Marketing Rules contain important guidelines for using performance marketing.
First, when reporting overall performance, advisors should report net performance with at least equal weight and in a format designed to facilitate comparison of the two measures. Gross and net productivity for the same period should be calculated using the same productivity calculation method.
Marketing rules require advisors to report performance over 1, 5 and 10 years (or from inception if the portfolio has not been in that period). Each period should be presented with equal emphasis and should end on the date before the end of the last calendar year. Private fund advisers are exempt from the tenure requirement. In addition, an advisor may report performance for periods other than one, five, and ten years if the statement provides results for the required annual, five, and ten year periods.
Speculative activity is allowed under marketing rules. This includes portfolio performance results unrelated to the actual portfolio managed by the advisor (when results are not actually achieved). Information about hypothetical results must be developed and presented in accordance with the financial situation of potential investors, which means that potential investors must have the knowledge and skills to understand and evaluate the hypothetical elements of results. Advisers using virtual portfolios must provide sufficient information about the portfolio's performance estimates, as well as the risks and limitations associated with hypothetical performance (eg, how the portfolio may perform under different market conditions). This shows net performance, reflecting the advisory fees that would have been paid if the hypothetical performance had been achieved using the actual portfolio.
Warning: Speculative statements will be subject to the strictest scrutiny by the SEC, and advisors should consider whether such statements are subject to the consultation process . Accordingly, we recommend limiting the use of these statements to situations where a customer or potential customer requests them.
Marketing rules allow advisors to display performance results for a portion of a portfolio's investments if the advisor provides performance results for the entire portfolio from which a set of investment sub-portfolios is derived. Derivative performance should include information on the effect of any cash held by the aggregated portfolio on actual reported performance. The Securities and Exchange Commission (SEC) is very clear that performance offers that are the result of "cherry-picking" one or more of the RIA's portfolios should be avoided. Thus, a performance component derived from a multi-adviser portfolio group may not meet the performance derivation rule because it is not a subset of investments derived from a single investment portfolio. Advertisements may include performance results of relevant portfolios. However, advisors should only include the performance of relevant portfolios that are substantially similar in design, structure and strategy to the advertised portfolio. When an RIA manages one or more linked portfolios, the marketing rule allows certain linked portfolios to be excluded if the ad performance results are "significantly greater" than if all linked portfolios were included.
Advisers may present past firm performance if the individual(s) is/are primarily responsible for the past portfolio management of the adviser firm. Additionally, the portfolios managed at the previous firm must be similar to the portfolios managed by the director's current firm. Other important disclosures regarding the use of past results are contained in the Marketing Rules. Consultants must maintain records to ensure the accuracy of the company's past performance as presented in current materials.
Form ADV Part 1
Securities and Exchange Commission 5.L. Create part ADV 1A. This section requires references to the advisor's statement and presentation of performance or specific investment recommendations, speculative results, past performance, reviews, endorsements or third-party ratings. Section 5.L also requires information about monetary and nonmonetary payments using third-party reviews, approvals, and ratings. Consultants will need to update their responses to item 5.L. when setting the annual renewal. However, we encourage RIAs to consider amending the applicable Form ADV by November 4, 2022 to avoid potential regulatory scrutiny.
books and records
The Securities and Exchange Commission amended Rule 204-2 of the Books and Records Act. The new marketing rules require RIAs to maintain more detailed documentation of the preparation and use of advertising, including certification and compliance systems.
The new marketing rules will require significant changes to the RIA compliance guidelines and the procedures and guidelines used to create, evaluate and approve marketing materials. Stark & Stark can help you ensure your company is ready for the November 4, 2022 compliance date. Marketing regulations open up some exciting new opportunities for RIA marketing, but these new opportunities come with a complex structure of compliance requirements that must be addressed in a timely and accurate manner to avoid future regulatory issues.
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